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Big Oil’s Best Survival Strategy

First, it was an oil price war that pummeled benchmarks into the ground. Then it was the coronavirus outbreak that swelled to a pandemic. Now, a third plague is coming for the oil industry, and it could be the most devastating yet.Calling it a plague is quite unfair, really. The third challenge for the oil industry is the green recovery that environmentalists started talking about during the crisis and now has been garnering growing attention and support from the public and private sector alike.

The European Union is spearheading the green recovery. The Commission is on board, and so are most EU members, apparently. Much of the business world seems to be in favor of a green recovery from the coronavirus crisis, too. And there seems to be a sound basis for this green drive.

A group of Nordic utilities, for instance, recently published an op-ed in which the authors argued that the EU's recovery from the latest economic crisis must be tied to climate change targets not just for climate's sake but for the sake of economic growth, too.

"The Green Deal is Europe's growth strategy. Making it the backbone of the recovery plan is not only necessary in a climate perspective, but also from an economic point of view – in order to create growth and work opportunities that are sustainable in the long run," they wrote, adding that electrification had to be at the heart of the green recovery.

"One sector still heavily reliant on fossil fuels is the transport sector, which accounts for approximately 20% of EU's greenhouse gas emissions," the authors noted. They went on to say that large-scale electrification of transport, including the construction of some 800,000 charging points over five years, was the solution to this emissions problem.

Related: Google Refuses To Assist Oil Companies Citing Ethic ConcernsWhile they acknowledged that this and other initiatives to electrify Europe's transport sector will require sizeable investments, the authors of the op-ed emphasized that, "Inadequate infrastructure is currently a barrier for increased deployment of carbon-neutral electricity and for renewable energy industries to expand and create work opportunities. Grid investments are also necessary in order to transport large amounts of electricity locally across Europe and is a cost-effective route to economic recovery."

What does all this have to with oil?

The most obvious problem for oil is that large-scale electrification of the continent will affect demand for fuel--and permanently, at that. A less immediate problem is the fact that European leaders have proposed a green recovery roadmap, as they call it, for every industry, and energy is no exception. These roadmaps will undoubtedly be tied to climate targets and will likely set such targets for the industries. What's more, pandemic recovery funds may well be tied to these roadmaps.

The BBC's Roger Harrabin, an environmental analyst, reported earlier this month that the leader of the team working on Europe's Green Deal is dead set against financial support for "old, dirty industries."

What's more, the EC's vice president Frans Timmermans insists that all recovery funds be directed at businesses that help to reduce carbon emissions and digital businesses.

This seems a little over the top, even in Europe—tying crisis recovery funds to businesses' activity so closely. Yet there is a big chance that the receipt of recovery funds will be somehow tied to the ambitious climate goals of the EU. One needs to look no further than the continent's supermajors to see that.

BP, Shell, and Total are all allocating ever-growing amounts of money to cleaner energy, Reuters reported earlier this week. All five biggest European oil majors—the abovementioned three-plus Eni and Equinor—are making the biggest spending cuts in their core oil and gas business, sparing their renewables and even raising spending there, according to Reuters calculations. The oil majors are moving away from oil.

Not all of them are doing it. The U.S. supermajors are more set in their ways. But then they are not facing the same kind of pressure to "greenify" as their European peers. The question for the latter appears to be whether they would greenify fast enough to ensure their long-term survival because the green recovery seems inevitable.

Some have questioned its merits and its financial basis as well as who will actually pay for it. Yet at least part of the green recovery will happen spontaneously as a consequence of the pandemic.

As Harrabin writes, people keen on maintaining the current social distance will likely continue to work remotely over the long term and opt for a bicycle over a bus for urban transport. Such changing behaviors will affect oil demand over the long term and—here is the important part—these changing behaviors may not remain confined to Europe.

The Covid-19 pandemic has changed the world for good, it seems, and one aspect of this lasting change appears to be energy demand. While many in the oil industry expect demand to rebound sooner or later, it may pay to plan for permanent damage to it, if governments maintain their green momentum and find the money to finance it. Just in case.

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I am struck by how different the European response to the times is from that of the U.S. We still worship energy that burns here. But I think we are poised for a change.

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